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The International Monetary Fund cut its forecasts for growth in 2012 on Tuesday and warned of a possible deepening downturn in Europe.

Revising an earlier forecast, the IMF predicted that the global economy will expand 3.3%, this year, down from 3.8% last year and lower than the 4% growth it had forecast last September.
“The world recovery, which was weak in the first place, is in danger of stalling,” IMF chief economist Olivier Blanchard said. “But there is an even greater danger, namely that the European crisis intensifies.

In this case, the world could be plunged into another recession,” he said.
Oliver Blanchard is spot on in identifying a serious threat to the world economy. His only error is from where he sees the threat coming and how bad it is.
On Monday IMF chief Christine Lagarde warned of a worst case scenario in the form of a possible Depression-era collapse in the global economy. If however Europe follows IMF recommendations, she said, the fund expects the euro zone to face a mild recession this year.

Nonetheless, it should be emphasised that this is still a “best case scenario.”
Economists are increasingly concerned that Greece will default within weeks. Even worse, the larger economies of Spain and Italy are now under threat, pushing up the cost for Rome and Madrid to borrow to cover the risk of default.
The IMF 2012 forecasts that the economies of both countries will contract, with Italy facing a contraction of 2.2% and Spain a fall of 1.7%.

Neither is expected to recover economically until 2014, at least. Meanwhile bigger economies such as the U.S., Japan, the U.K, France and Germany are expected to expand by only 1.5% on average next year, a growth rate too slow to curb rising unemployment levels. Moreover, the IMF forecast of slowing global economic growth is based on the assumption that the world will not see a dramatic rise in the price of oil. If that were to happen then the IMF’s most optimistic forecast would be null and void, making its worst case scenario seem optimistic.
Iran’s recent rhetoric about “closing the Straits of Hormuz” seems intended to play on such concerns; with growing fears that a dramatic rise in the oil price could completely undermine prospects for global economic recovery.

Although Tehran’s ambassador to the U.N. may have only been bluffing when he spoke recently about the “option” of closing the Straits, he seems to have hit a raw nerve.
Within days Western powers despatched naval vessels to the Straits of Hormuz – assuming, of course, that they had not planned this some time ago and were merely using his threats as an excuse.
Either way, as the European Union voted to impose harsher sanctions on Iran’s oil – and Iran responded by suggesting it could close the waterway through which 35% of the world’s oil is shipped – French, British and American warships were all sailing toward the gulf.

In response Iran declared defiantly that sanctions would provide it with an economic stimulous and repeated threats to close the straits. Between claim and counter-claim and trading threats the West and Iran seem to be on a course for a confrontation. If it erupts into armed conflict then the world may not only face a slowdown in growth and financial meltdown.

For both Russia and China have warned that they view the prospect of conflict with Iran with grave concern.
In fact Russia has repeated these warnings recently, as if to emphasise how seriously it views the situation. While China signalled a clear rejection of any new sanctions on Iranian oil. We live in dangerous times. They could be about to become even more perilous.source

Escalating tensions with Iran have pushed the cost of crude oil higher as fears mount that a 1970s-style jump in the oil price could send both Eastern and Western economies into recession.
Iran's threat to cut off access to the Strait of Hormuz – through which 40pc of the world's oil is shipped – has provoked an angry rebuke from the US, which has the Fifth Fleet nearby.

Today, French foreign minister Alain Juppe supported the American hard line with Tehran, and urged European leaders to impose an embargo on Iranian oil exports and freeze Iranian central bank assets by the end of this month. Currently, Italy imports 13.3pc of its oil from Iran, Spain 9.6pc, Greece 34.7pc and France 4.4pc.
International strains over Iran's nuclear ambitions were further exacerbated by the country staging three days of war games in the Hormuz area. However, Tehran said that increased sanctions could result in it closing off the strait, which it declared was "easier than drinking a glass of water".

But Iran's own oil supply is only part of the problem - the real threat is that disruption would halt the passage of oil from other Middle Eastern countries such as Saudi Arabia - the world's largest oil producer – and Kuwait. Qatar's liquified natural gas supplies would also be affected.
Roy Jordan, of FACTS Global Energy, said: "If supply through the Strait of Hormuz is cut off, just about everybody in the East and West would be in trouble. It would disrupt major proportion of the world's oil and gas at a time when many of the world's economies are very fragile and would not be able to sustain a serious oil spike."

Mr Jordan said that its effect on Asian countries, which are driving world growth, would be devastating. China, Iran's number one customer, imports 10pc of its oil supply from Iran.
"All it would take for Iran is a few mines put into sea, and ship owners and insurance companies would not go up there," said Mr Jordan.
Brent crude rose $3.74 at $111.12 and Mr Jordan warned that if Iran's threat was fulfilled "there would be an instant escalation of price – we saw $147 in 2008 – and it could definitely reach that level and even higher."
In 1974, after the Yom Kippur war and Iran's own embargo of its oil to countries supporting Israel, oil prices increased 400pc in six months.

However, Iranian officials have threatened to close the strait in the past but have not done so. But according to Mr Jordan if sanctions became such that Iran couldn't sell its oil then the country would have nothing to lose in its dealings with the West. "This is a situation we must avoid," he said.
If no resolution is found, or hostilities break out, the International Energy Agency would have to force its members to try to make up the shortfall by releasing supplies from their reserves.
But alternatives to Hormuz are few and far between. Iraq can already get its production into the Mediterranean through a pipeline across Turkey and a new Abu Dhabi pipeline is being built. This will come on stream early this year with 1m barrels of capacity, compared to the 18m that travel through Hormuz.

However, a recent article in Mashreq News, which is close to the Iranian military circles, pointed out that the new construction was "within range of Iran's missiles".
Analysts suggested that while the closure of Hormuz remained a threat a premium was already priced into internationally traded crude that would slowly tick higher and higher. But if the strained supply days of the 1970s were to return, governments – including the UK's – would have to enforce demand restraint, with only essential services like ambulances and police getting access to petrol.